What Is the Foreign Exchange Reserve?

Foreign exchange reserves identify foreign currency and bonds that are held by the world's central banks. The primary purpose of these reserves is to make official payments between countries. The world's leading industrial powers have found the gold standard to be unsustainable and now issue fiat currency, which often leads to inflationary policy. Central banks intervene within foreign exchange markets to influence exchange rates and international trade. Perceived mismanagement of foreign exchange leads to political fallout.

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   Foreign exchange reserves are used to make international payments and manage exchange rates.